Mrs Nirmala Sitaraman, Hon’ble Minister of Finance, announced the Corporatisation of Ordnance Factory Board (OFB). This is a long pending Reform.
Today, the 41 ordnance factories under the OFB are spread across 26 different locations in the Country. These factories manufacture a wide spectrum of products from weapons (small calibre, mortar equipment, medium and large calibre), ammunition (small medium and large calibre, mortar bombs, grenades, signalling smoke, rocket bombs, demolition, explosives, propellants and chemicals), vehicles (armoured and transport), clothing, general stores and equipment for the defence services and the Para Militart forces.
Due to the fact that Armed Forces & Para military forces have been captive customers, OFB lacked the professional attitude as is required from a production organisation. There was hardly any incentive to improve quality of its products. A dynamic system of getting customer feedback on quality and timely delivery issues was lacking . The Services have been constantly complaining about quality issues in OFB products and also the high cost of products due to high overhead charges in the OFB, including high maintenance charges, high supervisory and indirect labour charges.
The Standing committee on Defence and various CAG Reports have been critical about the OFB.On its part the OFB, functioning under the Dept of Defence production, was also constrained by the rules & regulations of the Government. Therefore decisions for major acquisitions, modernisation of plant and machinery, entering into a joint venture with other companies, entering into a ToT (transfer of technology) agreement etc, all are subject to government regulations and instructions. This naturally leads to reduction in the leverage and flexibility which any dynamic production and marketing unit requires. Also as a government department, the OFB cannot retain profits and therefore has no incentive to make profits. Thus the OFB in its present structure of departmental organisation is not appropriate for carrying out production activities in an efficient, economic & effective manner. Various committees in the past have recommended Corporatisation of the Ordnance Factories notably the TKA Nair Committee(2000) as well as Vijay Kelkar Committee (2004).
Continuing the Ordnance Factories in the current structure would also certainly prove financially and strategically costly for the users and consequentially for the country’s defence preparedness itself. Thus it is an absolutely necessary & urgent Reform. And, it may be stated that Corporatisation does not mean privatisation. The formation of a corporation would ensure that the ordnance factories get the requisite functional autonomy and are made accountable and responsible for their operations and performances to shareholders. Listing the corporatised OFB on the bourses will offer investors an opportunity to own shares in an important segment/ niche company.
But the success of Corporatisation of OFB would depend a lot on the policy decisions of the government in terms of funding, order flow and bureaucratic control. Once these are appropriately framed & implemented, Corporatised Ordanance Factories can play a pivotal role in the Atmanirbhar Bharat by carving out a niche in the domestic market. Increased exports can also lead to increased share in the international arms market.
Such organisation restructuring, monetisation and valuation of assets and preparation of the business model requires expertise. A professsional agency, free of pulls and pressures, should be identified on a Quality cum Cost Based System to undertake this humongous task in a definitive time period.
The ordnance factories are designed to churn out much bigger turnover (currently about Rs.13,000 crore pa) and carry the burden of large fixed overheads, some of which may not be fully captured in the kind of limited commercial accounting it follows.
The corporatization of OFB and consequent full-fledged commercial accounting will bring to the fore the total capital employed, total asset value and return on capital employed.
At a conceptual level, corporatization of OFB makes eminent sense. However, successful achievement of intended outcomes will depend on how it is implemented. We have a Railways model of slow and gradual corporatization and a Telecom MTNL/BSNL model of one-go corporatization. Point to ponder is whether all factories should be brought under a single corporate boundary or at least some of the 41 factories can be stand alone corporates. HR issues will be the most problematic.
Another relevant issue in this context is how much competition is commercially sustainable in different product segments because of huge capital cost involved in creating competing production capabilities. In defence, we can probably have multiple competing suppliers only for relatively low value items particularly dual use items but in the medium and high end defence systems built around proprietary designs and manufacturing licenses from foreign OEMs, paying capex to multiple manufacturers directly by MoD DDP or through built in component in price paid by Services will pose budget constraint. There may not be enough volumes of regular orders to support say multiple tank or artillery gun manufacturers.
To build scale and hence improve cost competitiveness, our defence manufacturing entities including OFB also need government support by way of a liberal export policy.
The OFB will also need to assume a greater responsibility towards its regime of price and quality control. Presently, it infuses very little confidence amongst its customers who are wary of the quality of ammunition, equipment and clothing being manufactured by the ordnance factories. The existing system of price negotiation adopted is also flawed. There is a requirement to benchmark the cost elements against a set of standard parameters. The Ordnance factories would need to gear themselves up with better precision instruments to bring about greater efficiency. A system of self certification would be in order for most of the products, which would greatly minimise delays in inspection by DGQA.
The OFB would also need to adopt outcome based budgeting. This would require a re-structuring of the defence budget in order to make it possible to allocate funds for specific programs/projects. Therefore one would have to earmark funds in a given year for procurement of rifles, guns, clothing, ammunition etc. This could then be used as a benchmark to gauge the performance of the OFB in a given year.
Presently, the OFB has little autonomy which has been detrimental to the functioning of the Ordnance factories. It would therefore be fair to grant a high degree of autonomy to the OFB to improve its functioning. An effective management system would need to be incorporated to ensure that OFB functions with a reasonable autonomy with essential checks and balances in place.
It would be imperative that the headquarters of OFB shifts its base from Kolkata to New Delhi. This will facilitate frequent interaction with the management, Board of Directors and the Stakeholders as also lead to a more effective decision making process in the larger interest of the Nation.